Selecting a Financial Planner

The Difference Between a Planner and an Adviser

In 2006, Lee Eisenberg wrote a book called The Number. The question he posed in this book was: How much money do you need to secure the rest of your life?

One of his answers was that “the number” kept changing. His theory was that many select an economic goal, but once they achieved it, they raised the dollar amount they wanted to reach.

After the recent market decline, we suspect many people who thought they were close to their desired retirement goal saw it slip from their grasp. As a result, many have postponed their retirement date, or if they were already retired have looked for part-time employment.

Most people join an investment club to learn more about investments so that they can manage their own portfolio. But given the shocks the stock market has delivered since October 2007, many have decided they could use some professional help planning their retirement and are seeking the services of a financial planner.

This month we’ll review whom we think benefits from working with a financial planner, how to find one and what services you should expect to receive. Ideally, once you’ve found a financial planner whom you like and trust, your relationship with the planner will be a lifelong one.

First, let’s make clear the difference between a “financial adviser” and a “financial planner.” We often see the terms used interchangeably by the media and even by some professionals, but the primary function of financial advisers is to manage your investments. Financial planners take a more comprehensive view; they look at your total financial picture, provide a written financial plan and then help you achieve your goals on an ongoing basis.

Why Seek the Advice of a Financial Planner?

Most people are motivated to seek the services of a financial planner because of a particular life event. The most common motivator is preparing for retirement. You might want to retire at a certain age but don’t know whether you can afford to do so and still maintain your lifestyle. Other motivating life events would include the death of a spouse, an inheritance, a job change, birth of a child, a marriage or a divorce — or a severe market decline.

A financial planner’s job is to sit down with you and help you define your short- and long-term financial goals. Once you’ve decided where you want to be financially, the planner creates a plan to help you obtain those goals. The initial financial plan is the starting point. To be effective, the plan should be reviewed regularly to make sure it’s adjusted for changes in the economy, tax laws and your own circumstances.

What’s Involved in the Planning Process?

Working with a financial planner isn’t a simple process. It requires your effort as well as that of the planner’s. First, you need to fill out a questionnaire that covers all aspects of your financial life. This would include listing your assets and liabilities, income and expenses, insurance coverage and tax and legal documents. We find that most clients have the most difficulty providing us with realistic budget figures.

Once you gather this information, the planner meets with you and spends some time reviewing the financial data with you; if you’re married or have a partner, he’d want to meet with both of you. He also helps you define and prioritize goals and talks to you about your risk tolerance. (We find that many clients who previously declared themselves risk takers have become more conservative.)

After this initial meeting, the planner combines your personal and financial information and prepares a written financial plan that gives you a picture of where you are now and whether your goals are obtainable in the desired time frame given your current situation. A typical plan includes a balance sheet as well as a taxable income and cash flow statement. We think the cash flow projections should reflect at least the next three years but may cover the rest of your projected life expectancy.

The plan would include an assessment of your current assets and make specific recommendations for actions you should take to better achieve your stated financial goals. This would include recommendations for estate and tax planning as well as your insurance coverage and asset allocation of your investments.

Once the plan is prepared, the planner meets with you again to ensure it meets your needs and makes any necessary adjustments. Next, the planner helps you implement the plan recommendations. Finally, the planner updates the plan with you regularly to make sure you’re on target to reach your financial goals.

After going through the financial planning process, most people decide to have the planner manage their investments, so this is where the financial adviser and the financial planner perform the same role. The difference is that the planner continues to give you advice based on your tax situation and long-term financial planning goals.

Why Can’t You Do This Yourself?

You can do some of it yourself. There are computer programs that can be helpful particularly for retirement and college planning. Doing this certainly is better than not doing anything. A computerized plan can do only so much, however.

For instance, the software program might tell you that you can’t retire at 55 as you wanted to do. But the financial planner could show you how to curtail spending, rearrange investments and save more so that you might be able to retire sooner rather than later. The planner could also help you understand the tax implications of corrective actions you consider taking.

Further, a planner can provide objective advice. For example, spouses may disagree about financial matters. One may believe it’s more important to leave money to their children than to travel now, while the other may think the opposite. In these cases, the planner can try to help the couple reach a compromise.

We live in an age of information overload. A lot of financial information is available in books, magazines, newspapers and on the Internet. In addition, friends offer financial advice based on their experiences. Some of this information is good, some isn’t, and it’s almost always contradictory. The job of a financial planner is to help you sort through all this conflicting information and determine what action makes sense for you.

How Do You Find a Financial Planner?

The best way to do this is to ask family, friends and other professional advisers for referrals.

Ask whether they have worked with or know of a financial planner who has helped people achieve their goals. Another source is the Financial Planning Association, which maintains a database of financial planners searchable by ZIP code and area of specialty. Visit its website or call toll-free at 800/647-6340.

Once you have the names of two or three financial planners, call their offices and ask for explanatory material about themselves and their firm. Included in this material should be Form ADV, which details the work experience of the firm’s principals as well as services provided. Most firms have a website that will provide information about the firm.

Once you’ve reviewed that material, make an appointment to meet for an introductory interview. This interview is usually free and is a “get to know you” session.

What Information Do You Need to Obtain About a Financial Planner?

When you review the preliminary material, look for answers to the following questions. Some of this information will be available in the material; other questions can be answered in the initial meeting.

What qualifies you to give financial planning advice?

A Certified Financial Planner practitioner is the best-known educational credential in the financial planning profession, but there are others that require the planner to pass a comprehensive financial planning examination, agree to fulfill continuing education requirements and abide by a code of ethics.

How long have you been providing financial planning advice to clients?

We recommend that the planner have at least three years’ experience working with clients or under the supervision of a more experienced planner.

Do you specialize in working with a certain kind of client?

Some planners require new clients have a minimum level of income or assets, or both. Many planners specialize in working with a certain type of client (doctor, corporate executive, business owner, widow) and may not want to work with other types of clients.

How do you charge for your services?

Here again we need to distinguish between what a financial planner charges and what a financial adviser charges. Most planners assess an hourly fee for their planning advice and may have a minimum fee. Some planners charge a flat fee, while others will waive their planning fee if you decide to engage them as your financial adviser.

One way or another, preparing a personalized, effective financial plan requires time and experience. Just as you pay doctors, lawyers and accountants for their professional advice, so should you pay your financial planner.

For investment advice, most planners charge a separate investment advisory fee based on the assets managed. Some may charge a commission for transactions in your portfolio and an annual monitoring fee.

However they charge, the financial planner should clearly state in writing what they’ll charge and how they’ll charge for planning advice as well as for investment advice.

Do I have to receive a comprehensive financial plan or could I receive planning advice only about retirement planning?

Could I even meet with you on an hourly basis for consultation? Most planners offer all three approaches. After the planner meets with you and helps you establish financial goals, he can tell you what he thinks you need — a comprehensive financial plan or a simpler, more targeted plan. He might even believe the regular hourly consultation is a good approach for you.

Do you provide services besides financial planning, such as tax preparation, investment management and estate planning? Some planners provide only financial planning advice and work with other advisers to provide additional services. Other planners provide some or all of related services.

What’s the Next Step?

After you meet with the planners, you’ll decide whom you want to work with on an ongoing basis. Just as you select a doctor or lawyer, this person should be experienced, educated and empathetic. After working with this planner for a while, he’ll know more about you than most people do, so trust is an integral part of your decision.

If you decide to move forward, the planner typically provides a written contract that spells out what he’ll do for you and what he needs you to provide to him. He’ll tell you how he’ll charge for his services and how you’ll be billed. The first year together is the hardest because it’s a “getting to know you” period. After this initial year, if the financial planning process is working as it should, you’ll find a confidence in knowing that you’re doing all you can to achieve your financial goals.

Planning at Each Life Stage

Since we’re financial planners, we admit to being biased. We think everyone can benefit from consulting a financial planner.

When you’re young, you could start out meeting with a planner periodically to make sure you’re making intelligent decisions as you work on building your assets. These decisions include what kind of house you can afford to buy, what insurance coverage you should have and how to build your children’s college funds.

When you reach middle age and have accumulated more assets and responsibilities, a comprehensive financial plan may be more appropriate. As you near retirement, you can focus on retirement planning. After you retire, you can do some post-retirement planning, which would include more estate planning.

As we hope we’ve made clear, financial planning is a lifetime process. To achieve your financial goals, you need help to survive market turbulence as well as adapt to tax law changes. We think having a professional financial planner by your side as you deal with life’s events should make it easier for you to do so.

Alexandra Armstrong is co-author of the fourth edition of On Your Own: A Widow’s Passage to Emotional and Financial Well-Being. She is a Certified Financial Planner practitioner and chairman of Armstrong, Fleming & Moore, Inc., a registered investment advisory firm in Washington, D.C. Securities are offered through Commonwealth Financial Network, member FINRA/SIPC. Investment advisory services are offered through Armstrong, Fleming & Moore, Inc., an SEC-registered investment adviser not affiliated with Commonwealth Financial Network.

Karen Preysnar, Certified Financial Planner practitioner, co-author of this article, is vice president in charge of financial planning at Armstrong, Fleming & Moore, Inc., and a registered representative with Commonwealth Financial Network.

Individuals should contact a financial planner, tax adviser or attorney when considering these issues. Commonwealth Financial Network does not give tax or legal advice. Consult your personal adviser before making any decisions. The authors cannot answer individual inquiries, but they welcome suggestions for article topics.